As fears mount that Italy could be sucked into the vortex of the euro-zone debt crisis, consider this: The country’s public finances are among the strongest in the European Union.

Say what?

Italy is one of just five EU countries that are expected to run a primary surplus — meaning that, excluding debt interest payments, their income is greater than their spending — in 2011, according to the European Commission’s spring economic forecast. Its primary surplus is expected to be 0.8% of gross domestic product, less than only Hungary and Sweden, and higher than the rest of the euro zone, including stalwarts such as Germany and Finland.

Advertisement

The figure shows that Italy’s budget sins are largely in the past: interest payments on the country’s mountain of debt, accumulated during years of lax budget policy, are expected to be 4.8% of GDP, the second-highest in the EU after Greece .

Forgetting the past, Italy is in fine shape.

So what, you might say. To quote William Faulkner: “The past is never dead. It’s not even past. Italy’s large current budget deficit is going to be a problem decades from now.” (Okay, I may be misremembering part of this quote.)A deficit is a deficit, whether the cause is borrowing to fund current operations or borrowing to pay interest on existing debt.

Maybe so. But Italy’s primary surplus shows that the government as currently configured can pay its own way, even during a time of weak economic growth. That’s much more than can be said for Greece, Portugal, Ireland or even Spain, all of which are expected to run primary deficits this year.

Moderately higher growth and/or inflation — and some time — would help solve the country’s historical debt burden. Italy is expected to pay a 4% rate on its outstanding debt this year; but annual nominal GDP growth hasn’t broken 3% in five four years, and it averaged just 3.7% from 2001-2007.

Without more nominal GDP growth, Italian debt must rise. New measures pledged by the Italian government are aimed at raising the country’s long-term growth rate. This might be a steep hill to climb: changing long-term growth rates is a notoriously difficult task that could take years.

Or the euro zone could intervene to drive down Italian yields below the country’s 3% nominal GDP growth rate, putting Italian debt on a downward trajectory. That’s what the European Central Bank is doing this morning through its bond purchases. But seven-year yields are at 5.02%, requiring a lot more buying from a reluctant ECB to get the job done.

Even if euro-zone governments significantly expand the size of their bailout fund, the European Financial Stability Facility, the lowest rate it can charge on loans is 3.5% — still above Italy’s nominal GDP growth rate in recent years.

So higher growth rates, more inflation and time appear to be Italy’s main hopes to atone for the budget sins of the past.

About Real Time Brussels

The Wall Street Journal’s Brussels blog is produced by the Brussels bureau of The Wall Street Journal and Dow Jones Newswires. The bureau has been headed since 2009 by Stephen Fidler, who was previously a correspondent and editor for the Financial Times and Reuters. Also posting regularly: Matthew Dalton, Viktoria Dendrinou, Tom Fairless, Naftali Bendavid, Laurence Norman, Gabriele Steinhauser and Valentina Pop.